Opinion: Plan for ‘black swan’ events in your business

The term “black swan event” was coined by Nassim Nicholas Taleb in his 2007 book, “The Black Swan,” to describe unexpected events with a major impact.

There are positive black swan events — scientific discoveries, for example — and negative ones, such as the March 9.0 earthquake and subsequent tsunami in Japan.

The disaster has had widespread ramifications well beyond the heartbreaking devastation in Japan. Manufacturers worldwide are feeling the effects of the disaster on their supply chains as they weigh challenges ranging from infrastructure and energy to utilities and transportation. Given the potential supply chain disruption, you have to wonder: Can a manufacturer ever be ready for these unknowns?

To an extent, yes. The best way is to continue to plan — and yes, you can plan for black swan events. Annual strategic planning sessions are a must, and mixing both short- and long-term strategies offers the best avenue to success. Best-in-class organizations continually cite the benefits of being able to react quickly and modify plans on the go. Planning has never been more important in manufacturing than it is today.

A good first step is to take inventory. Bloated inventory levels result in higher carrying costs, negatively impact cash flow, and tie up working capital. But too little inventory results in missed sales, poor service and, perhaps eventually, losing customers. Ongoing anticipation and monitoring of customer needs and commodity availability is critical in finding the balance between the cost of excess stock and the risk of lost sales and lost customers.

Second, keep your financial house in order. Building corporate net worth, manageable debt levels and appropriate cash flows is more critical than ever. While these financial measures have always been important, the need to be flexible and nimble is hampered by weak balance sheets. OEMs expect financial strength from their supply base and are willing to source more to those that have it.

Finally, understand the flow of the supply chain and the impact of a part interruption on your organization. Recognize, for example, that a vehicle may consist of more than 15,000 parts, or that durable goods in industries such as plumbing, hardware, appliance and medical devices may have hundreds of parts per item; missing even one can shut down the entire production line.

Do you understand how your parts produced interface with the entire supply chain and the final products to be sold? Are you monitoring your production needs to be ready to quickly react if an interruption occurs? Do you have effective contingency plans in place? Knowing the dependencies along the supply chain — including the commodities needed, the multiple suppliers and the markets served — will help.

In a 2007 New York Times article discussing “The Black Swan,” the reporter argues that there are two ways to approach these phenomena. The first is to rule out the extraordinary and focus on the “normal.” The second is to consider that in order to understand something, you first need to consider the extremes, particularly — as in black swan events — if their effects are significant. Although it’s tempting to stick with the normal, I recommend planning for the outliers.

Rich Antonini is a partner at Plante & Moran in Grand Rapids who concentrates his practice in manufacturing.